Bus411 Day 9 and 10

Bus 411
DAY 9
Copyright 2005 Prentice Hall
Agenda
Assignment #3 due Assignment #4 will be assigned next class Templates available in WebCT Discussion on Mid-term
Before or after Spring Break?
Finish Discussion about Strategies Start Discussion on Strategy Analysis and choice
Ch 6 -2
Michael Porters Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
http://www.quickmba.com/strategy/generic.shtml Copyright 2005 Prentice Hall
Ch 6 -3
Generic Strategies
Cost Leadership
In conjunction with differentiation Economies or diseconomies of scale Capacity utilization achieved Linkages w/ suppliers & distributors
Ch 6 -4
Generic Strategies
Low Cost Producer Advantage
Many price-sensitive buyers Few ways of achieving differentiation
Buyers not sensitive to brand differences

Large # of buyers w/bargaining power
Examples
Walmart, McDonalds
Ch 6 -5
Generic Strategies
Differentiation
Greater product flexibility
Greater compatibility Improved service
Greater convenience
More features Examples LL Bean, BMW
Ch 6 -6
Generic Strategies
Focus
Industry segment of sufficient size Good growth potential Not crucial to success of major competitors Examples
Starbucks, Illinois Tools

Ch 6 -7
Means for Achieving Strategies

Joint Venture/Partnering
Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.
Ch 6 -8

Cooperative Arrangements
R&D partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia
Ch 6 -9

Why Joint Ventures Fail
Managers who must collaborate daily; not involved in developing the venture Benefits the company not the customers Not supported equally by both partners May begin to compete with one of the partners
Ch 6 -10
Joint Ventures
Guidelines -Synergies between private and publicly held
Domestic with foreign firm, local management can reduce risk Complementary distinctive competencies Resources & risks where project is highly profitable (e.g. Alaska Pipeline) Two or more smaller firms competing w/larger firm Need to introduce new technology quickly
Ch 6 -11

Mergers & Acquisitions
Provide improved capacity utilization Better use of existing sales force Reduce managerial staff Gain economies of scale Smooth out seasonal trends in sales Gain new technology Access to new suppliers, distributors, customers, products, creditors
Ch 6 -12
Recent Mergers
Acquiring Firm IBM Yahoo U.S. Steel Pfizer Krispy Kreme Doughnuts Oracle Palm Nike
Acquired Firm Rational Software Corp Inktomi Corp National Steel Corp Pharmacia Montana Mills People Soft Handspring Converse
Ch 6 -13
First Mover Advantages
Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms.
Ch 6 -14
First Mover Advantages

Potential Advantages
Securing access to rare resources Gaining new knowledge of key factors & issues Carving out market share Easy to defend position & costly for rival firms to overtake
Ch 6 -15
Outsourcing
Business-process outsourcing (BPO)
Companies taking over the functional operations of other firms
Ch 6 -16
Outsourcing
Benefits
Less expensive Allows firm to focus on core business Enables firm to provide better services
Ch 6 -17
Chapter 6 Strategy Analysis & Choice

Strategic Management: Concepts & Cases 10th Edition Fred David
PowerPoint Slides by Anthony F. Chelte Western New England College
Ch 6 -18
Chapter Outline
The Nature of Strategy & Choice
A Comprehensive Strategy-Formulation Framework
The Input Stage
Ch 6 -19
Chapter Outline (contd)

The Matching Stage
The Decision Stage
Cultural Aspects of Strategy Choice
Ch 6 -20
Chapter Outline (contd)
The Politics of Strategy Choice
Governance Issues
Ch 6 -21
Strategy Analysis & Choice

To acquire or not to acquire, that is the question Robert J. Terry
Life is full of lousy options -General P.X. Kelley
Ch 6 -22

Nature of Strategy Analysis & Choice -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives
Ch 6 -23

Alternative Strategies Derive From -
Vision Mission Objectives External audit Internal audit Past successful strategies
Ch 6 -24

Generating Alternatives -Participation in generating alternative strategies should be as broad as possible
Ch 6 -25
Comprehensive Strategy-Formulation Framework

Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage
Ch 6 -26
Strategy-Formulation Analytical Framework

Internal Factor Evaluation Matrix (IFE)
External Factor Evaluation Matrix (EFE)
Competitive Profile Matrix (CPM)
Ch 6 -27
Basic input information for the matching & decision stage matrices
Requires strategists to quantify subjectivity early in the process Good intuitive judgment always needed
Ch 6 -28
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Ch 6 -29
Match between organizations internal resources & skills and the opportunities & risks created by its external factors
Ch 6 -30

SWOT Matrix
Strengths Weaknesses Opportunities Threats
Ch 6 -31
SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO) Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT)
Ch 6 -32
SO Strategies
Strengths Weaknesses Opportunities Threats SWOT
SO Strategies
Use a firms internal strengths to take advantage of external opportunities
Ch 6 -33
WO Strategies
WO Strategies
Improving internal weaknesses by taking advantage of external opportunities
Ch 6 -34
ST Strategies
ST Strategies
Use a firms strengths to avoid or reduce the impact of external threats
Ch 6 -35
WT Strategies
Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats
WT Strategies
Ch 6 -36
SWOT Matrix
Developing the SWOT
List firms key internal List firms key internal List firms key external List firms key external
Strengths Weaknesses Opportunities Threats
Ch 6 -37
SWOT Matrix
Strengths S Leave Blank Opportunities O
List Opportunities List Strengths
Weaknesses W
List Weaknesses
SO Strategies
Use strengths to take advantage of opportunities
WO Strategies
Overcoming weaknesses by taking advantage of opportunities
Threats T
List Threats
ST Strategies
Use strengths to avoid threats
WT Strategies
Minimize weaknesses and avoid threats
Ch 6 -38
Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor
20% annual growth in the cell phone industry (opportunity)
Resultant Strategy
Excess working capacity (strength)
Acquire Cellfone, Inc.
Insufficient capacity (weakness)
Exit of two major foreign + competitors form the = industry (opportunity)
Pursue horizontal integration by buying competitor's facilities
Strong R&D (strength)
Decreasing numbers of young adults (threat)
Develop new products for older adults
Poor employee morale (weakness)
Strong union activity (threat)
Develop a new employee benefits package

Ch 6 -39
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Ch 6 -40
SPACE Matrix
Strategic Position & Action Evaluation Matrix
Aggressive Conservative Defensive Competitive
Ch 6 -41
SPACE Matrix
Two Internal Dimensions
Financial Strength (FS) Competitive Advantage (CA)
Two External Dimensions

Environmental Stability (ES)
Industry Strength (IS)

Ch 6 -42
SPACE Factors
Internal Strategic Position External Strategic Position
Financial Strength (FS)

Return on investment Leverage Liquidity Working capital Cash flow
Environmental Stability (ES)

Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand
Ease of exit from market Risk involved in business
Ch 6 -43
SPACE Factors
Internal Strategic Position External Strategic Position
Competitive Advantage CA
Market share Product quality Product life cycle Customer loyalty Competitions capacity utilization Technological know-how Control over suppliers & distributors
Industry Strength (IS)

Growth potential Profit potential Financial stability Technological know-how Resource utilization Ease of entry into market Productivity, capacity utilization
Ch 6 -44
SPACE Matrix
Conservative FS
+6 +5 +4 +3 +2 +1
Aggressive
CA
-6 -5 -4 -3 -2 -1 -1 -2 -3 -4 +1 +2 +3 +4 +5 +6
IS
Defensive
-5 -6
Competitive ES
Ch 6 -45
The steps to develop a SPACE Matrix:
Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS).
Table 6-2 provides Good examples
Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make up the FS and IS dimensions. Assign a number between 1 (best) to 6 (worst) for variables that make up the ES and CA dimensions. On the FS and CA axes, make comparison to competitors. On the IS and ES axes, make comparison to other industries. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables and dividing by the number of variables included in each dimension. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE Matrix. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization.
Aggressive Competitive Defensive Conservative
Lets try with Data in table 6-3

Ch 6 -46
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Ch 6 -47
BCG Matrix
Boston Consulting Group Matrix
Enhances multi-divisional firm in formulating strategies Autonomous divisions = business portfolio Divisions may compete in different industries Focus on market-share position & industry growth rate
Ch 6 -48
BCG Matrix
Relative Market Share Position
Ratio of a divisions own market share in an industry to the market share held by the largest rival firm in that industry.
Ch 6 -49
BCG Matrix
Data required
Relative market Share for each Division

Horizontal axis Compare to leading firm (1 means you are the leading firm)
Industry growth pattern
Vertical axis
Size of circle Size of pie slice
Percentage of Corporate Revenues generated by division
Percentage of Corporate Profits generated by division
Ch 6 -50
BCG Matrix
Relative Market Share Position
High 1.0 High +20 Medium .50 Low 0.0
Industry Sales Growth Rate
Stars II
Medium
Question Marks I
Cash Cows III

Low -20
Dogs IV
Ch 6 -51
BCG Matrix
Question Marks
Low relative market share compete in highgrowth industry
Cash needs are high
Case generation is low
Decision to strengthen (intensive strategies) or divest
Ch 6 -52
BCG Matrix
Stars
High relative market share and high growth rate
Best long-run opportunities for growth & profitability
Substantial investment to maintain or strengthen dominant position

Integration strategies, intensive strategies, joint ventures
Ch 6 -53
BCG Matrix
Cash Cows
High relative market share, competes in lowgrowth industry
Generate cash in excess of their needs
Milked for other purposes
Maintain strong position as long as possible

Product development, concentric diversification
If weakensretrenchment or divestiture
Ch 6 -54
BCG Matrix
Dogs
Low relative market share & compete in slow or no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Ch 6 -55
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Ch 6 -56
Bus 411
DAY10
57
Agenda
Assignment #3 Not corrected
Will be done by next class PUT your names on the assignments!
Assignment #4 was mailed to in WebCT Templates available in WebCT Mid-term after Spring Break
Handed out Mar. 14 Due Mar 17
Finish Discussion on Strategy Analysis and choice

Ch 6 -58

Ch 6 -59
IE Matrix
The IE Matrix positions an organizations various divisions in a nine-cell display illustrated in Figure 610. The IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization divisions in a schematic diagram; this is why they are called portfolio matrices. Differences between the IE Matrix and the BCG Matrix
Axis's are different. IE Matrix requires more information about divisions than BCG. Strategic implications of each matrix are different.
Ch 6 -60
Steps to Create an IE matrix
For each division in the organization

Construct an IFE matrix and record score Construct an EFE matrix and record score Creates an circular Pie for each division
Percentage of Corporate Revenues generated by division
Size of circle Size of pie slice
Percentage of Corporate Profits generated by division
Place each divisional pie in IE matrix based on

EFE score y axis IFE score x axis

Ch 6 -61
IE Matrix
Strong 3-4 High 3-4 IFE Scores Average 2-2.99
Grow and Build
Hold and Maintain

Harvest or Divest Weak 1-1.99
II
III
EFE Scores
Medium 2-2.99
IV
VI
VII
Low 1-1.99 Copyright 2005 Prentice Hall
VIII
IX
Ch 6 -62
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Ch 6 -63
Tool for formulating alternative strategies Based on two dimensions
Competitive position
Market growth
Ch 6 -64
RAPID MARKET GROWTH

1. 2.
3.
4. 5. 6.
Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation
1. 2.
3.
4. 5. 6. 7.
WEAK COMPETITIVE POSITION

1. 2. 3. 4. 5.
Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures GROWTH
Quadrant III Retrenchment 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Liquidation SLOW MARKET
STRONG COMPETITIVE POSITION
Ch 6 -65

Quadrant I
Excellent strategic position Concentration on current markets/products Take risks aggressively when necessary
Ch 6 -66

Quadrant II
Evaluate present approach How to improve competitiveness Rapid market growth requires intensive strategy
Ch 6 -67

Quadrant III
Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost & asset reduction (retrenchment)
Ch 6 -68

Quadrant IV
Strong competitive position Slow-growth industry Diversification to more promising growth areas
Ch 6 -69

Ch 6 -70
Quantitative Strategic Planning Matrix (QSPM)
Ch 6 -71
QSPM
Quantitative Strategic Planning Matrix
Technique designed to determine the relative attractiveness of feasible alternative actions
Ch 6 -72
QSPM
Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Weight
Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3
Ch 6 -73
Six steps to developing a QSPM:

1. 2. 3.
Make a list of the firms key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM. Assign weights to each key external and internal factor.
1. Weights for each category should add up to one.
4.
1. 2.
Examine the Stage 2 matrices and identify alternative strategies that the organization should consider implementing. Determine the Attractiveness Scores (AS). (1-4)
1=not attractive 4=highly attractive
5. 6.
1.
Compute the total AS.
1. Weight * AS
Compute the sum Total AS.
Range should be from 2-8
Ch 6 -74
QSPM
Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Weight
Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3
Ch 6 -75
QSPM
Limitations
Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs
Ch 6 -76
QSPM
Advantages
Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decision making process
Ch 6 -77
Cultural Aspects of Strategy Choice

Organization Culture
Successful strategies depend on the degree of consistency with the firms culture
Ch 6 -78
Politics of Strategy Choice
Politics in Organizations
Management hierarchy
Career aspirations
Allocation of scarce resources
Ch 6 -79
Successful Strategists :
Were found to let weakly supported ideas and proposals die through inaction and to establish additional hurdles or tests for strongly supported ideas considered unacceptable but not openly opposed.
Ch 6 -80
Politics of Strategy Choice

Political tactics for strategists
Equifinality
Same outcomes by different means
Satisfying
Good results with acceptable strategy is better than excellent results with an unpopular strategy
Generalization
Less detail
Higher-order issues
Take care of the big stuff first
Political access on important issues for Middle Managers

Agency and political avenues for redress
Ch 6 -81
Governance Issues
Board of Directors Roles & Responsibilities
Control & oversight over management Adherence to legal prescriptions
Consideration of stakeholder interests

Advancement of stockholder rights
Ch 6 -82
Corporate Governance Issues

Business Weeks principles of good governance
1. No more than 2 directors current or former company executives 2. No directors do business with the company 3. Audit, compensation, and nominating committees made up of outside directors 4. Each director attends at lest 75% of all meetings 5. Audit committee meets at least four times a year 6. CEO is not also the Chairperson of the Board 7. Shareholders have considerable power and information to choose & replace directors 8. Stock options are considered a corporate expense 9. No interlocking directorships
Ch 6 -83

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Bus 411

Copyright 2005 Prentice Hall

Before or after Spring Break?

Copyright 2005 Prentice Hall

Michael Porters Generic Strategies

Cost Leadership Strategies

Buyers not sensitive to brand differences

Starbucks, Illinois Tools

Means for Achieving Strategies

Copyright 2005 Prentice Hall

Means for Achieving Strategies

Copyright 2005 Prentice Hall

Means for Achieving Strategies

Means for Achieving Strategies

First Mover Advantages

Copyright 2005 Prentice Hall

First Mover Advantages

Copyright 2005 Prentice Hall

Companies taking over the functional operations of other firms

Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall

Chapter 6 Strategy Analysis & Choice

Copyright 2005 Prentice Hall

A Comprehensive Strategy-Formulation Framework

The Input Stage

Copyright 2005 Prentice Hall

Chapter Outline (contd)

The Decision Stage

Cultural Aspects of Strategy Choice

Copyright 2005 Prentice Hall

Chapter Outline (contd)

The Politics of Strategy Choice

Copyright 2005 Prentice Hall

Strategy Analysis & Choice

Life is full of lousy options -General P.X. Kelley

Copyright 2005 Prentice Hall

Strategy Analysis & Choice

Copyright 2005 Prentice Hall

Strategy Analysis & Choice

Copyright 2005 Prentice Hall

Strategy Analysis & Choice

Copyright 2005 Prentice Hall

Comprehensive Strategy-Formulation Framework

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Copyright 2005 Prentice Hall

Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

External Factor Evaluation Matrix (EFE)

Competitive Profile Matrix (CPM)

Copyright 2005 Prentice Hall

Stage 1: The Input Stage

Copyright 2005 Prentice Hall

Strategy-Formulation Analytical Framework

Stage 2: The Matching Stage

Grand Strategy Matrix

Copyright 2005 Prentice Hall

Stage 2: The Matching Stage

Copyright 2005 Prentice Hall

Stage 2: The Matching Stage

Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall

Strengths Weaknesses Opportunities Threats SWOT